In re Energy Future Holdings Corp.

In Re: ENERGY FUTURE HOLDINGS CORP., ET AL., Debtors

DELAWARE TRUST COMPANY f/k/a CSC Trust Company Delaware, as Indenture Trustee, Appellant

No. 15-1591

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Submitted: March 23, 2016

May 4, 2016

NOT PRECEDENTIAL

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

(D.C. No. 1-14-cv-00723)

District Judge: Hon. Richard G. Andrews

Submitted Under Third Circuit L.A.R. 34.1(a)

March 23, 2016

Before: GREENAWAY, JR., VANASKIE, and SHWARTZ, Circuit Judges.

OPINION^*

SHWARTZ, Circuit Judge.

Debtor Energy Future Holdings Corp. ("EFH") and its subsidiaries, including Energy Future Intermediate Holdings Corp. ("EFIH") (collectively, "Debtors"), with the approval of the Bankruptcy Court, settled claims with certain creditors holding notes secured by a lien on Debtors' assets. Delaware Trust Company, as indenture trustee (the "Trustee"), asserts that the settlement involved a tender offer that is impermissible in bankruptcy and that the settlement violates core principles of the bankruptcy process. Because the settlement was consistent with bankruptcy law, we will affirm.

I

Debtors comprise the largest electrical energy company in Texas. Their creditors included EFIH noteholders. Each note was governed by an indenture and some were secured by a first lien on Debtors' assets (the "First Lien Notes"). One set of the First Lien Notes represents a principal amount of $500 million with an interest rate of 6 7/8%, due in 2017 (the "6 7/8% Notes"). The other set of Notes represents a principal amount of approximately $3.5 billion with an interest rate of 10%, due in 2020 (the "10% Notes"). Each indenture contains a provision providing for a "make-whole" premium, which would "compensate noteholders for the loss of future interest resulting from an early refinancing." Appellant's Br. 9. Thus, the make-whole premium would require Debtors to make additional payments to the First Lien Noteholders if the Notes were redeemed before their final maturity.

Debtors sought to restructure this debt in 2012 and began negotiating with creditors, including some of the First Lien Noteholders. Following almost two years of negotiation, Debtors and several large creditors, most notably Pacific InvestmentManagement Company ("PIMCO"), Western Asset Management Company ("WAMCO"), and Fidelity Investments ("Fidelity"), agreed to a Restructuring Support Agreement ("RSA"), initially intended to accomplish a "global restructuring" of the Debtors' entities and debt. Although the idea of a global restructuring was eventually abandoned, under the RSA, these entities agreed to refinance the First Lien Notes, release any claim to a make-whole premium, and provide additional financing.¹

Because the RSA did not resolve all of their financial problems, Debtors filed for bankruptcy under Chapter 11 in the United States Bankruptcy Court for the District of Delaware.² One week after filing their bankruptcy petition, Debtors initiated what the parties have labeled a "tender offer" directed to the First Lien Noteholders that embodied certain terms set forth in the RSA. The goal of this offer was to settle disputes with all First Lien Noteholders.

The offer was to remain open for thirty-one days, and offered each First Lien Noteholder 105% of the Notes' principal amount and 101% of the accrued interest in exchange for the release of any potential claim to the make-whole premium. The offer contained a "step down" procedure, reducing the principal premium from 5% to 3.25% after fourteen days. The offer notified the First Lien Noteholders that the offer wassubject to Bankruptcy Court approval and that Debtors intended to initiate litigation to disallow the make-whole premium claims.³ Under the make-whole provision, due to the lower interest rate and earlier redemption date, the 6 7/8% Noteholders' make-whole premium would have been smaller than that of the 10% Noteholders. Thus, under the terms of the offer,, holders of the 6 7/8% Notes would receive a greater percentage of a possible recovery for the make-whole premium than the 10% Noteholders.

Ultimately, 97% of the 6 7/8% Noteholders accepted the offer, while only 34% of the 10% Noteholders did so. Noteholders who declined the offer retained their full claim and the right to litigate and obtain full value for their make-whole premium.

Nine days after initiating the offer, Debtors filed a motion for approval of the settlement pursuant to 11 U.S.C. § 363(b) and Fed. R. Bankr. P. 9019. The Trustee, on behalf of the non-settling First Lien Noteholders, objected to Debtors' request for approval of the settlement. Following a hearing at which it heard testimony about the benefits of the settlement, including that the offer would save the estate over ten million dollars each month in interest payments, the Bankruptcy Court approved the settlement, holding that there were no "incidents of discriminatory treatment" in the Debtors' approach to settlement and that the plan was a proper use of estate assets. JA 169. The District Court affirmed the Bankruptcy Court's approval order. The Trustee appeals.

II⁴

A

A bankruptcy court has the authority to "approve a compromise or settlement" of a claim "after notice [to the debtor, trustee, and creditors] and a hearing" on the compromise. Fed. R. Bankr. P. 9019(a). The bankruptcy court must then decide whether the settlement is "fair and equitable," In re Nutraquest Inc., 434 F.3d 639, 644 (3d Cir. 2006) (quoting Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968)), and "assess and balance the value of the claim that is being compromised against the value to the estate of . . . accept[ing] . . . the compromise" by considering: "(1) the probability of success in ligation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors." In re Martin, 91 F.3d 389, 393 (3d Cir. 1996).

In this case, the Trustee challenges the conclusion that the settlement is fair and equitable. In short, it asserts that use of tender offers as a means to settle claims isimpermissible under Chapter 11. It also argues that the offer violates the equal treatment principle. Finally, it contends that the settlement constituted an impermissible sub rosa plan. We will address each argument in turn.

A

Although the parties have called the arrangement here a "tender offer," in this case it was simply a means to convey a settlement offer to certain creditors who were expected to make claims against the assets of the bankruptcy estate.

Under 11 U.S.C. § 363(b), a debtor may use estate property outside the ordinary course of business, upon notice and a hearing, to settle claims with the approval of the bankruptcy court. Northview Motors, Inc. v. Chrysler Motors Corp., 186 F.3d 346, 350 (3d Cir. 1999); see Fed. R. Bankr. P. 9019 (providing for bankruptcy court approval of settlements). The bankruptcy court is charged with ensuring that such settlements are "fair and equitable." See Martin, 91 F.3d at 393 (citation omitted). Of course, this includes confirming that the proposed settlement does not contravene the Bankruptcy Code.

To the extent the offer allowed noteholders to receive payment in exchange for abandoning their make-whole claims constitutes a type of "tender offer," it clearly did not violate the Bankruptcy Code. The "tender offer" here was merely a mechanism to communicate the settlement offer. It detailed the proposed terms of the offer, set forth the reasons for the offer, explained the dispute over make-whole premiums and informed creditors of Debtors' intention to litigate the validity of the claims, disclosed associated risk factors, and notified all offerees that the settlement was subject to court approval.Practically speaking, the "tender offer" in this case was equivalent to a detailed settlement memorandum in any other case.

Moreover, the Trustee has failed to identify any section of the Bankruptcy Code that forbids settlements using a tender offer process.⁵ All of the code sections on which the Trustee relies relate to reorganization plans, such as § 1125 (requiring court approval for solicitation of a plan), § 1126(c) (providing for class voting on plans), and § 1128 (plan confirmation), and "class-based" procedures for negotiation inherent to the bankruptcy process. None of the sections apply to court-approved settlements entered before the plan confirmation process has begun. Thus, there is nothing to show the use of such a process contravenes the Bankruptcy Code.

Having concluded that the settlement offer here did not violate the Code, we next examine whether the Bankruptcy Court acted within its discretion in approving the settlement. We conclude that it did.

The Bankruptcy Court's decision reflects thorough consideration of the Martin factors concerning the complexity of the litigation over the make-whole claims and the delays associated with such a suit. The EFH bankruptcy is large and complicated. Theparties were well aware of the likelihood of protracted litigation regarding the recovery on the make-whole premiums. Thus, the settlement offer significantly reduced the "complexity and inconvenience" of the litigation. Nutraquest, 434 F.3d at 646.

The Martin factor concerning the fairness to creditors also supported approving the settlement. The settlement here provided each First Lien Noteholder the ability to recover the same proportion of its principal and accrued interest, and made clear Debtors' intent to challenge the validity of the make-whole premiums, placing each creditor on notice that its entitlement to such a premium might be eliminated in full. The settlement further detailed numerous risk factors related to the bankruptcy proceeding. In addition, it provided that a noteholder who chose not to settle preserved its claim at the same...